stETH vs ETH

    Comparing Price Action

    Loading...

    Background

    Ether (ETH) is the native cryptocurrency of the Ethereum blockchain; a decentralized, open-source blockchain with smart contract functionality. Recently the core Ethereum development team launched the Beacon Chain, which is a parallel proof-of-stake chain to the traditional proof-of-work mainnet. With the Beacon Chain, users can stake ETH to earn validator rewards and network fees.

    stETH is a token that represents staked ether in Lido, (an application that provides Beacon Chain staking services) combining the value of initial deposit + staking rewards. stETH tokens are minted upon deposit and burned when redeemed. stETH token balances are pegged 1:1 to the ethers that are staked by Lido. stETH token’s balances are updated when the oracle reports change in total stake every day.

    The mechanism which updates the stETH balances every day is called a “rebase”. Every day at 12PM UTC the amount of stETH in Ethereum wallets increases with the current annualized product rate (APR).

    Price Action

    stETH tokens are minted in the ratio 1:1 to the ETH that is staked by Lido. However, by design stETH tokens are inherently different from ETH due to it being rebasing token. Let's look at the chart below which shows the price action of both stETH and ETH and make some analysis.

    Conclusion

    In this post, we have investigated the origins and mechanism behind liquid staked ETH (stETH) pricing and charted the price action of both stETH and ETH. Since late July 2021, the price difference between stETH and ETH has widened and we believe that it is a result of the exponential increase in the circulating supply of stETH which has affected the price peg of 1:1.

    The price of stETH and ETH since December 2020 has not exhibited any significant difference until July 25, 2021, when a significant split occurred. What factor was responsible for this significant difference? According to Lido's documentation, a rebase happens each day at 12 PM UTC to stETH tokens to reflect the stake rewards being accumulated.

    As large amounts of ETH are being poured into Lido to stake, the rewards gained also increase in magnitude which when rebased can significantly impact the price. To test this hypothesis, let us look at the circulating supply of stETH over the same period of time. If there is a significant increase in circulating supply, then we know that it had an effect on the rebase pricing of stETH.

    Loading...

    Looking at the chart above showing the circulating supply of stETH between June and October 2021, we can see a sharp rise in July from ~500k to ~1.2M stETH which is more than a 100% increase. This increase in the circulating supply is likely to be responsible for the difference in pricing.